Why it matters: July 2016 saw two DOJ resolutions under the Foreign Corrupt Practices Act (FCPA) where we saw the DOJ’s new FCPA Pilot Program in operation. One case resulted in a DPA, and the other resulted in a declination letter (the third such letter issued to date by the DOJ since the FCPA Pilot Program was announced in April 2016). The different results appeared to turn on the disparate levels of voluntary self-disclosure to and cooperation with the DOJ by the two target companies, as well as the robustness (or lack thereof) in the companies’ remediation efforts.
Detailed discussion: Here, we discuss two DOJ resolutions from July 2016 where we saw the DOJ’s new FCPA Pilot Program in operation. One case resulted in the DOJ entering into a deferred prosecution agreement (DPA) with LATAM Airlines Group, S.A., while in the other case the DOJ sent Johnson Controls, Inc. a declination letter (the third such letter issued to date by the DOJ since the FCPA Pilot Program’s inception in April 2016—we discussed the first two declination letters in our July 2016 newsletter under “Focus on the FCPA: Self-Disclosure + Cooperation = Declinations and NPAs Edition”). The disparate levels of self-disclosure to and cooperation with the DOJ in the investigations, as well as the relative robustness of remediation efforts undertaken by the two target companies, appeared to be the key factors for the DOJ in arriving at these different resolutions.
Case #1—DPA for LATAM Airlines Group S.A. (LATAM): On July 25, 2016, the DOJ announced that LATAM, a commercial airline company based in Chile, agreed to pay a $12.75 million criminal penalty and enter into a three-year DPA to resolve allegations that it violated the FCPA by paying bribes to Argentine union officials via a false consulting contract with a third-party intermediary (we covered the resolution of FCPA charges against former LAN CEO Ignacio Cueto Plaza in our February 2016 newsletter under “FCPA and Anti-Money Laundering Enforcement Review—‘Follow the Money’ ”). In a related settlement in the parallel investigation by the SEC, LATAM agreed to pay over $9 million in disgorgement plus pre-judgment interest.
According to the DOJ’s press release, LATAM admitted to the following facts in the resolution documents: (a) executives at LATAM’s predecessor-in-interest, LAN Airlines S.A. (LAN), executed a fictitious $1.15 million consulting agreement with an advisor to the Secretary of Argentina’s Ministry of Transportation in October 2006 under which the consultant was to undertake a study of Argentine airline routes, (b) the advisor never provided the consulting services and instead funneled the monies he received pursuant to the contract to Argentine labor union officials in exchange for the union agreeing to accept lower wages and to not enforce what would have been a costly labor rule and (c) such bribes to the Argentine labor union officials resulted in over $6.7 million in profits to the airline.
As part of the three-year DPA the DOJ entered into with LATAM to resolve the matter, in addition to the criminal penalty LATAM was obligated to continue to cooperate with the DOJ’s investigation, enhance its compliance program and retain an independent corporate compliance monitor for a term of at least 27 months. While not specifically invoking the FCPA Pilot Program in the press release, the DOJ said that it arrived at its resolution with LATAM based on factors that comprise distinct elements of the FCPA Pilot Program, including LATAM’s failure to voluntarily self-disclose the alleged wrongdoing or adequately remediate, and its belated cooperation in the investigation:
The department reached this resolution based on a number of factors, including the fact that LATAM did not voluntarily disclose the FCPA violations, but did cooperate with the department’s investigation after the press in Argentina uncovered and reported the conduct approximately four years after it had occurred. After LATAM began cooperating, it did so fully and provided all relevant facts known to it, including about individuals involved in the misconduct. LATAM did not, however, remediate adequately. LATAM failed to discipline in any way the employees responsible for the criminal conduct, including at least one high-level company executive, and thus the ability of the compliance program to be effective in practice is compromised. As a result, the company paid a penalty within the U.S. Sentencing Guidelines range instead of receiving a discount off the bottom of the range (emphasis added).
Case #2—Declination letter for Johnson Controls, Inc. (JCI): On July 11, 2016, the SEC announced that JCI, a Wisconsin-based global provider of HVAC systems, agreed to pay more than $14 million (consisting of $11.8 million in disgorgement, pre-judgment interest of almost $1.4 million, and a civil penalty of almost $1.2 million) to settle charges that it violated the books and records and internal accounting controls provisions of the FCPA. According to the SEC’s findings (which were neither admitted to or denied by JCI), Johnson’s wholly owned Chinese subsidiary used sham vendors to make improper payments of approximately $4.9 million to employees of Chinese government-owned shipyards to obtain and retain business.
Also on July 11, 2016, the DOJ released a letter (dated June 21, 2016) to JCI declining prosecution in the parallel DOJ investigation. The declination letter specifically invoked the FCPA Pilot Program and cited to JCI’s strong levels of self-disclosure, cooperation and remediation as the key elements in the DOJ’s decision not to prosecute:
Based upon the information known to the Department at this time and consistent with the FCPA Pilot Program, we have closed our inquiry into this matter despite the bribery by employees of JCI’s subsidiary in China. We have reached this decision based on a number of factors, including but not limited to: the voluntary self-disclosure of the matter by JCI; the thorough investigation undertaken by the Company; the Company’s full cooperation in this matter (including its provision of all known relevant facts about the individuals involved in or responsible for the misconduct) and its agreement to continue to cooperate in any ongoing investigations of individuals; the steps that the Company has taken and continues to take to enhance its compliance program and its internal accounting controls; the Company’s full remediation (including separating from the Company all 16 employees found to be involved in the misconduct, including high-level executives at the Chinese subsidiary); and the fact that JCI will be disgorging to the SEC the full amount of disgorgement as determined by the SEC, as well as paying a civil penalty to the SEC (emphasis added).
In other FCPA news:
- On August 8, 2016, Zimmer Biomet Holdings Inc. (which acquired Biomet in 2015 and assumed its liabilities) disclosed in a securities filing that “it is probable that Biomet will incur additional liabilities” related to the ongoing DOJ and SEC investigations into FCPA violations that have occurred subsequent to Biomet’s FCPA settlement (which resulted in a DPA with the DOJ) in 2012. The company said that it has accrued additional unspecified amounts for possible FCPA penalties because “[t]he DOJ has informed Biomet that it retains its rights under the DPA to bring further action against Biomet relating to the conduct in Brazil and Mexico disclosed in 2014 or the violations set forth in the DPA.”
- On July 8, 2016, the DOJ announced that two former executives of Louis Berger International (LBI) were sentenced in connection with a long-running bribery scheme to secure government construction management contracts by bribing officials in India, Indonesia, Vietnam and Kuwait. The DOJ said that (1) the former SVP of operations in Indonesia, Thailand, the Philippines and Vietnam was sentenced to two years of probation and fined $10,000 and (2) the former SVP of operations in India and Vietnam was sentenced to one year plus one day in jail. The former executives had each pleaded guilty to violating the FCPA on July 17, 2015, the same day that LBI had entered into a DPA with the DOJ and agreed to pay a $17.1 million criminal penalty for admitting to criminal violations of the FCPA for the same violations. See also our “Spotlight on the False Claims Act” article in this same newsletter where we discuss the DOJ’s filing of a complaint against the former CEO and CFO of Louis Berger Group Inc. for False Claim Act violations in connection with reconstruction contracts in Iraq and Afghanistan.
See here to read the DOJ’s 7/25/16 press release entitled “LATAM Airlines Group Resolves Foreign Corrupt Practices Act Investigation and Agrees to Pay $12.75 Million Criminal Penalty.”
See here to read the DOJ’s 6/21/16 declination letter to Johnson Controls, Inc.
See here to read the SEC’s 7/11/16 press release entitled “Global HVAC Provider Settles FCPA Charges.”
See here to read the DOJ’s 7/8/16 press release entitled “Two Former Executives Of Louis Berger International Sentenced In Foreign Bribery Scheme.”